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Higher Investor Protection Standards Ahead Regardless of DOL Fiduciary Outcome

Authored by: Maria Cardow, Director, Synechron Business Consulting

After several years in the making, the Department of Labor (DOL)’s Fiduciary Regulation passed this summer and by April 2017, but is now at risk of being overturned given the recent US election outcome. Regardless, many businesses are operating in a global regulatory environment where MiFID II and other global regulations still require advisors to completely change the way they represent their investment recommendations with the need to prove suitability.

After an SEC report issued in October showed record enforcement action in 2016, firms should expect that even if the DOL’s Fiduciary Rule is rolled back, they will be held accountable by regulators for higher standards of investor protection and should still be thinking about whether they are offering the same products, using the same systems and recording the same-old data – which in today’s complex investment environment is not enough. Advisors need to fundamentally rethink how they ‘prove’ suitability - with enforcement in mind.

First Steps to Pave the Way
The industry is already seeing major players like Merrill Lynch rethink their investment offerings, recently announcing it would cease offering new advised or commission-based, brokerage IRA accounts, showing the regulation’s ability to impact product line-ups. It is likely that other companies will also re-examine their product offerings, discontinuing certain offerings where they deem it too difficult to prove suitability or where they feel the risk is too high of a perceived conflict of interest due to commissions received or fees.

It will also be important for advisors to be able to demonstrate they are recommending low-fee and high-performance products. That is why companies like Envestnet have doubled down on data analytics. With the recent purchase of Wheelhouse Analytics, the firm expects to use insight into client portfolios and peer-to-peer benchmarking to give advisors a tool to support suitability documentation. Others, like Merrill Edge, are considering introducing robo-advice offerings, with BOA Merrill having announced plans to do so later this year.

These differing technology-lead approaches demonstrate that current operations and technology are insufficient to capture the multi-dimensional data needed to prove suitability of an investment for a specific client taking into account the risk profile, the product with its risks and performance, the state of the market at that point in time, and all of the many factors that go into an investment decision.


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